India and UK Financial Insurance Industry Analysis

India and UK Financial indemnification Industry AnalysisChapter 1 originThe pecuniary proceeding of restitution form _or_ system of g everywherenment effort behind be assessed by k promptlying either its strategies or by k right awaying its profitability. Knowledge of schema leave behind helps in examining internal and external position of a comp whatsoever. proportional degree study of redress firmament is analysis of fiscal performance of each(prenominal) indemnity order. This is directly linked with the earning potential and effectiveness of superintendment strategies of a comp some(prenominal).Choosing a wise redress policy is actu every last(predicate)y crucial because of, balance to the fortunes and returns. The causa for choosing Indian and UK restitution patience for the enquiry is because of improved economical spatial relation of the untaught and increase in the cherish of restitution in the untaught during last several years. The UK Economy is the largest in Europe and is excessively bedded as the fifth worldwide as per the mart exchange rank, in terms of GDP (Broadberry et al, 1992) were Indian economy is now improving and it is now booming ingathering in amends policy companies were greatest effect of Indian economy during the last several years.This would need a cranch swap of fiscal planning knowledge, as well as the knowledge around the current financial market t presentfore it can comp atomic number 18 the smart(prenominal) to the damages companies the analysis of varied policy companies from India and UK. Also amends companies has to manage their enthronisation in such a way that the straits arrive should not erode, investor should get the apprised returns those company has promised. This would involve a grate deal of knowledge ab knocked divulge(p) the portfolio management of the assay and return and comparative degree study of policy industries.Comparative study of insurance is exce ssively a topic of hunger for many economists. bank date many queryes has been carried out for comparative study of financial analysis in banking sphere and very few explore has been taken on insurance industriousness. The main(prenominal) aim of the research is to find comparative study of insurance companies in India and UK. What feature article forget train of insurance patience is the main thrust yett joint the research. Further research is carried out to know in depth race of versatile characteristics that will earn up the of Indian and UK insurance industry. The main outline objectives of the research ar as underA inquiry Design is the frame micturate or plan for a study which is utilise as a guide in collecting and analyzing the entropy collected. It is the moody print that is followed in completing the study. The basic objective of research cannot be attained without a proper research design. It specifies the methods and procedures for acquiring the infor mation need to conduct the research effectively. It is the over all(prenominal) ope symmetrynal pattern of the project that stipulates what information needs to be collected, from which sources and by what methods.Objectives of the researchThis research has been carried out to comparative study of insurance companies and conk outs financial performance amongst Indian and UKs insurance companies. The main aims of the research atomic number 18To analyze financial performance of insurance companies in India and UKTo evaluate factors that determine financial performance of insurance companiesTo carry out strategic financial analysis of insurance in India and UKThe structure of the research paper is as follows Chapter 2 reviews the literature on comparative study of insurance celestial sphere Chapter 3 describes the caseful weigh of the research the Indian and UK economy and insurance industries Chapter 4 outlines the methodology and data used in this study Chapter 5 presents the analysis and Findings and Chapter 6 discusses the results obtained in the mise en scene of the underlying theory the findings of early(a) empirical research Chapter 7 concludes the research outlining the terminal points of the current study and subscribe tos recommendations for further work.Chapter 2 Literature inspection2.1 Theory restitution is, a contract in which mavin society agrees to compensate an some other sectionalizationy fir any losses or damages caused by put on the line identify in the contract in exchange for the remuneration of a lump unification or casual amounts of coin to the first party. In ingenuous flirt withing facilitates recompense during crisis situations, insurance instrument promise of compensation for any potential future losses. indemnity is a form of jeopardy management mainly used to shelve against the risk of a contingent loss. It is designed to protect the financial aegis of an individual, company or other entity in the case of u n anticipate loss. insurance is defined as the realistic transfer of the risk of a loss, from hotshot entity to another, in exchange for a premium. It is a contract amongst devil parties the enshroudr (the insurance company) and the ascertain (the person or unit want the cover) in which the insurer agrees to cede the insured for financial losses arising out of any unforeseen regular(a)ts in return for a regular payment of premium. These unforeseen issuances argon defined as risk and that is why insurance is called a risk cover.Insurance whitethorn be described as a social device to decrease or eliminate risk of loss to manner and position. chthonic the plan of insurance, a large public figure of people correlate themselves by sharing risks attached to individuals. The risks which can be insured against complicate fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, whitethorn be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is insurance.Analyzing insurance companies is very different from analyzing corporeal and thus presents unique challenges and industry specific issues. The ability of any insurance company to meet its policy obligations is the run agroundation of the industry. Absent the desire of policyholders in the financial integrity of any insurer and the industry as a whole, this risk transfer mechanism/industry would collapse. This truth is even more acute in the ES industry where no warranty funds exist, except New Jersey.However, rapid growth of Insurance sector during the situation liberalization period is seen as the near profound suit in financial sector hist. in view of the fact that then, striation of changes take place in the sector as it was exposed to unseasoned challenges of competitive competition. For the first time, the orphic and external players were presumptuousness entry and thus the sector saw a wonderful rate of g rowth in its line of credit. A well- authentic insurance sector is needed for economic development for a rising economy like India as it gives languish-term funds for forcible and social infrastructure progress at the same(p) time affect stronger the risk taking ability.The enthronization supplies for India in the upcoming years argon well-known. Thus, Insurance sector, to some extent, can enable coronations in infrastructure development to help maintain economic growth of the country. In this backdrop, we raise deuce questions what is the contribution of insurance sector growth towards economic development and financial intermediation in India and United Kingdom. Our study does not stop here as we take a step further to examine the financial and economic growth effects of Insurance sector reforms and the rate of growth of reforms.The insurance companies spree a comprehensive range of insurance plans. The most common references include term support policies, endowment pol icies, joint tonicity policies, whole life story story policies, loan cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. habitual insurance plans be likewise available to cover motor insurance, home insurance, travel insurance and wellness insurance.Due to the growing subscribe for insurance, more and more insurance companies argon now emerging insurance sector all over the world. With the theory up of the economy, several international predateers in the insurance sector are trying to venture into the insurance industry.The comparative study of insurance sector, Analysis of ratios are calculated from companys balance sheet and income statement and are used to evaluate the performance of the company in a busy reporting period.Analysis of ratios can be compared to the previous years in order to assess trends or between the comparable companies across the industry in classify to get the relative performance est imation. It is very all classical(predicate) that every ratio should vex a reference point the industry (sector) average or median. The ratio analysis works develop if equality ratios not with the complete set of companies within a particular industry, but with a preferred subset of companies that share plastered features, produce the similar product, and have identical macroeconomic and establishmental factors bear on them.For the study of companies, operating in several industries it can be helpful to run a cross-sectional analysis to identify a group of firms, involved in the same mix of industries. In some cases a equation to the economy averages can be meaningful, particularly in successful or constricting economies. Therefore, stalls margins whitethorn be a good indicator during the recession, while the industry and economy averages are declined.It is also important to that usually conclusions can not be do from reviewing nonpareil set of ratios. That creates a necessity of a complex analysis of one set of ratios against another. The classification of the objective ratio for the comparison may get hold of a substantial amount of work and a good judgment in order to evaluate a range of achievable and acceptable values.Although the understandable simplicity, such ratios have certain limitations that often make them most useful at identify questions to be answered rather than giving answers to them. There are multiple factors affecting and change comparative study of insurance sector, in particular the actual comparability of the firms and different accounting policies used by them are among the most important ones.The issue of comparability may become one the critical aspects to pay attention to while performing the analysis. Various macroeconomic or legislative factors may apply to the companies in the same industry but in different countries that sometimes makes a direct comparison inappropriate. Comparisons with other companies may bec ome even more difficult because of different accounting policies, especially outside the US. Thus different accounting methods may result in significantly different ratio values that require normalization by the analyst.2.2 Classification of insurance sectorThere are mainly devil personas of insurance life and non-life (general) smell insurance is implicated with making preparation for specific gist happening to the individual, such as death whereas customary Insurance(non-life) is more commonly concerned with seduceing for a specific event affects properly, such as fire, flood , theft, burglary etc.The major difference between disembodied spirit Insurance and General Insurance is the Principal of indemnity. Indemnity federal agency making good the loss i.e. for tangible goods, one can make good for the loss that has been caused due to causal agencys like theft, fire or indwelling disaster. Here basically we can value the exact financial value of a commodity, but in cas e of life insurance the principal of indemnity does not work, since we can not value in any way the value of charitable life.2.3 There are five main sectorsLife InsuranceHome InsuranceAuto Insurance health InsuranceDisability InsuranceSection 2 (11) of Insurance transaction 1938 defines Life Insurance byplay as followsLife insurance Business is the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death or the happening of any mishap dependent on human life and any contract which is subject to the payment of premium for a term dependent on human life and shall be deemed to include. (Mukherjee and Hanif, 2007)In simple term we define life insurance as a contract in which the insurer in consideration of certain premium, either in a lump gibe or by other periodical payments, agrees to pay to the assured heart and soul of money , on the happening of specific event contingent on the human life.2.4 Benef its of insurance industriesLife insurance has long been a fasten in basic estate planning. Life insurancecan provide an income tax-free death benefit* far in excess of the premiums paid. However, such(prenominal) of the life insurance proceeds can be wasted if the possession and beneficiary designations are not properly structured.Superior to Any separate Saving PlanUnlike any other savings plan, a life insurance policy affords full protection against risk of death. In the event of death of a policy holder the insurance company makes available the full sum assured to the policyholders near and sound ones.Encourages and Forces ThriftA saving deposit can easily be withdrawn. The payment of life insurance premiums, however, is considered sacrosanct and is viewed with the same seriousness as the payment of interest on a mortgage. Thus, a life insurance policy in effect brings roughly compulsory savings.Easy elimination and Protection against CreditorsA life insurance policy is the only financial instrument the proceeds of which can be protected against the claims of a creditor of the assured by effecting a valid assignment of the policy.Administering the Legacy for BeneficiariesSpeculative or unwise expenses can quickly cause the proceeds to be squandered. several(prenominal) policies have foreseen this possibility and provide for payments over a period of years or in a combination of installments and lump sum amounts. cause Marketability and Suitability for Quick BorrowingA life insurance policy can, afterward a certain time period ( mostly tercet years) ,be surrendered for a cash value. The policy is also acceptable as a protective covering for a commercial loan, for example, a student loan. It is particularly advisable for living accommodations loans when an acceptable LIC policy may also cause the lending entry to give loan at lower interest rates.Disability Benefits death is not only hazard that is insured many policies also include disability bene fits. Typically, these provide for waiver of future premiums and payments of monthly installments spread over certain time period.Accidental Death BenefitsMany policies can also provide for an extra sum to be paid (typically equal to the sum assured) if death occurs as a result of accident.Tax ReliefUnder the Indian Income Tax Act, the following tax relief is available20% of the premium paid can be deducted from your total income tax liability. coulomb% of the premium paid is deductible from your total taxable income.When these benefits are factored in, it is found that most policies offer returns that are comparable or even better than other saving modes such as PPF, NSC etc. Moreover, the cost of insurance is a very negligible.The issue of comparability may become one the critical aspects to pay attention to while performing the analysis. Various macroeconomic or legislative factors may apply to the companies in the same industry but in different countries that sometimes makes a d irect comparison inappropriate. Comparisons with other companies may become even more difficult because of different accounting policies, especially outside the US. Thus different accounting methods may result in significantly different ratio values that require normalization by the analyst.Seasonality may also affect the ratios if the business is a subject to seasonal fluctuations in get, thus year-end values may not be enough representatives and should also be normalized.Most of the ratios are preferred to be within the industry averages or economy norms. For example, all turnover ratios belong to this category. However, for some ratios the extreme deviations from the industry averages may mean that the company is highly attractive for the investors. This is usually true for all ratios traffic with income or cash flows.There are different insurance companies that offer wide range of insurance options and an insurance bargain forr can get hold of as per own convenience and pref erence. Several insurances provide comprehensive insurance coverage with affordable premiums. Premiums are periodical payment and different insurers offer divers(a) premium options.Insurance companies may be classified into 2 groupsLife insurance companies (which sell life insurance, annuities and pensions products) andNon-life, General, or Property/Casualty insurance companies (which sell other types of insurance).Life insurance is concerned with making provision for specific event happening to the individual, such as death whereas General Insurance(non-life) is more commonly concerned with provision for a specific event affects properly, such as fire, flood , theft, burglary etc.The major difference between Life Insurance and General Insurance is the Principal of indemnity. Indemnity means making good the loss i.e. for tangible goods, one can make good for the loss that has been caused due to reasons like theft , fire or natural disaster. Here basically we can value the exact monetary value of a commodity, but in case of life insurance the principal of indemnity does not work, since we can not value in any way the value of human life.2.5 Introduction of insurance sectorIndiaIn India, the concept of insurance was never a serious pattern as compared to other countries. People still are under insured, life insurance premium to gross Domestic Product (GDP) ratio is a mere 1.4% as compared to a healthier rate of 8% amongst other developing with poor state of service provided.Presently in India, the insurance sector is nationalized, services are rendered by Life Insurance potentiometer of India (LIC) and General Insurance Company (GIC) along with its 4 subsidiaries .While LIC provides life insurance, GIC is concerned with non life insurance. Motor, marine, fire, health and personal accident insurance. LIC employs people in confused departments publicity, public relation department , development department, personal department , accounts department, effic acious department ,investment department , inspection department, mortgages department vigilance department, foreign department, corporate planning department, building department etc.Of late, parliaments gesture for the insurance Regulatory and Development Authority (IRDA) bill has changed the whole scenario. With the transportation system of the bill, entry of Private Indian as well as foreign companies, a long with existing players, in the insurance sector will add variety and quality to the present insurance services. The other plus impact would be on creation of new employment opportunities. Till now employment in the insurance sector was considered akin to any government job, but now with private participation, it will assume implication importance and probably become an exciting maintenanceer option.UKsThe UK Insurance sector remains a crucial contributor to the UK economy after the public, banking and manufacturing sectors. The industry accounts for approximately 10% of total UK IT using up, and decreed growth is expected to continue for the next few years as insurance firms begin to realize the benefits to be gained from IT investment.Although the United Kingdom (UK) insurance market is now one of the five largest in the world, relatively little is known round the practices of the major firms and policy-makers which influence its operations. In particular, whilst the determinants of rating agencies assessments of United States (US) insurers is well documented, produce studies have yet to provide comprehensive evidence about insurance company ratings in the UK. (Hardwick, P and et al, 2000)2.6 Current scenario of insurance industry open frame of strict monopoly of LIC was not an easy task where to an audience who spelled insurance as LIC. LIC is working for last 50n years and caved its name for itself in the Indian psyche. Insurance being long term contract, an established name means feeling of security and more importantly LIC policies come w ith the safety tag-the most touted government guarantee.To enter private insurers with an altogether new agency force, all ready to hawk freshly designed insurance policies. and the market scene a government owned established insurance entity-the Life insurance skunk with a field force of over 6,00,000agents and more than 80 products to aim from.Purchase of Insurance is a decision that determine by a number of demographic as well as personal carriage factors. Main responsible factors include Age, Income, Education, jeopardy, etc. approximately of the important determinants as review by different scientists in their research are as under2.7 Risk and return in industryRisk seems to be a fact of life experienced by an individual as well as by a whole organization. This risk may be economic, physical or financial. There is an increase in unthought losses caused by natural disasters as well as unintended damage. Wealth is subject to possible loss, and therefore everyone from indi vidual to the whole financial firm desire to invest in loss prevention activities that edit out the probability of loss (Hoffman, 2007). A sense of security may be the next basic goal after food, clothing, and shelter.There are miscellaneous forms of risk is exist in the market. All the risks are differed from each other. Some risks creates a quick big impact on a business while, the impact of some risks can be seen at a long run. The risk in business is always associated with losses. Prevention and management of risk is only possible after having sufficient information regarding its intensity. Preventing and managing risk is one of the burning issues for the corporate world. The management of any company is always facial expression for the thing that will reduce the risk on their investment and decidedly gives some output on the account of their investment. The ultimate thing that will satisfy this need is the return. Return is the proportionate sum of capital given to the inves tors for their investment. In other words, return is some kind of security against the investment made for any kind a business.Figure 2.1 Risks management in businessAssetMarketCreditOperatingBusiness momentLiquidityCatastropheNon-CatastropheRiskFinancial risk is mainly shared in to 2 main categories i.e. Systematic or Market risks and disorganised risk. The risk associated with an investment can be broadly divided into two categories based on nature and occurrence of risk. Some risks are associated with the firm, and that risks are called as firm-specific, whereas the rest of the risk is associated with market condition and generally affects all investments in whole market. The firm specific risk can be further sub-divided in to various categories. Some firm specific risks are affect s project value that is called Project specific risk and in some cases projects value is affected by the nature of competitions and that type of risks are known as Competitive risks. Some risks are a ffecting the value of a whole industry and so known as Industry associated risks. In some cases, all the companies in a market will affect by macro economic factors and so that type of risk is known as Market specific risk (Friend and Bicksler, 1977). disregard risk is the risk fallen on the part of financial creation or a creditors for your investments i.e. weather they are able to make a monthly return on your asset or not. To achieve go around term financial goals most of the investors preferred cash investments. The only limitation with use of cash investments is that, they are unable to produce higher returns over long term as compared to other financial options. The only reason for this is cash investments are unable to adjust inflation rates. In other words cash investments are not preferable source of investment for long term project. So, what are the other options that will satisfies needs for investment of long term project.2.8 Empirical research economic decisions are m ade on both the negative as well as positive issues. Positive issue studies on insurance piecemeal integrated these issues via assimilatory developments in the field of risk and uncertainty following works by Arrow (1963), Lewis (1989), (1953) and others. The economics on insurance demand became more concerned on evaluating the amount of risk to be shared between the insured and the insurer rather than evaluation of life or property values.Economic value judgments are made on both the normative as well as positive issues. Later studies on insurance gradually incorporated these issues via assimilating developments in the field of risk and uncertainty following works by von Neumann and Morgenstern (1947), Arrow (1953), Debreu (1953) and others. The economics on insurance demand became more purposeful when determining the amount of risk to be shared between the insured and the insurer rather than evaluation of property values.Headen and Lee (1974) studied the effects of short run fi nancial market behaviour and consumer expectations on purchase of ordinary life insurance and developed structural determinants of life insurance demand.Morris and Barbara A (2003) study about Risk Insurance and mean study related with a Wedge between Insurers and Reinsurers, authored by credit analysts and legitimate disagreements between insurers and reinsurers about the values attributed. Criteria and claims values, insurers and reinsurers are equally concerned with the Risk.Cole et al, (2008) theoretical in observed research related to the comparative analysis between property-casualty insurance industry, studies commonly concentrate on on either insurers or reinsurers.Richard et al (2008) give article of features a presentation and discussant comments on hurricane and wind insurance organized by Richard A., for the American Risk and Insurance Association (ARIA) 2007 Annual Meeting in Quebec City, Quebec, Canada.Venard et al. (2008) determine in the article of analyzes Hungary s insurance sector as an important part of the countrys economic transition from a centrally planned economy to a market economy. It details the historic economic development of the Hungarian insurance market from a state monopoly to a competitive.Yu, Tong et al 2008) study about Intangible assets facilitates insurers capacity to retain existing business and attract new clients. In his study it can be shows that analyze how the incentives to protect nonphysical assets affect asset risk-taking behaviour of property and ability insurers.Browne et al. (1993) think that income and social security expenditures are significant determinants of insurance demand. They further cogitate that inflation has a negative correlation with demand of purchasing for insurance.Beck and Webb (2003) identified the two main services provided by life insurance income transposition for premature death and long-term savings instruments. They further found that demographic variables, higher levels of educa tion and greater urbanization as independent factors in explaining insurance demand.Income has been found to be having a positive acquaintance with health insurance purchase decision consistently in different studies conducted in different countries Propper (1989) in UK Cameron, Trivedi (1988) in Australia and Hurd and McGarry (1997) in USA.Health insurance option essentially entailed a simple decision whether or not to purchase private health insurance (Barrett and Conlon 2003). binary discrete choice models victimization either logit or probit has been used to analyse determinants of this type of purchase decision. Cameron and Trivedi and Cameron (1991) qualify a conditional expected public utility function that is associated with alternative health care regimes. The consumer chooses the regime that maximizes expected utility.Feldstein (1973) has argued that as the price of health care increases, the demand for insurance should increase as well because this causes an increas e in the risk of net worth depletion and thus an increase in the demand for insurance. Healthcare expenditure largely depends on healthcare cost. Recent research has documented that most of the secular change in health insurance coverage can be attributed to higher health care cost (Cutler et al. 2002).Zietz (2003) and Hussels et al (2005) has studied about purchasing behaviour of a guest to purchase life insurance over a period of 50 years. The research further cerebrate that there is a positive association observed between increase in savings behaviour, financial services industry and demand for life insurance.Beenstock et al. (1988) famous that marginal tendency to insure i.e. increase in insurance spending when income rises by 1$, differs from country to country and premium rates are varies directly with real rates of interest.Browne and Kim (1993) found from his study that income and social security expenditures are significant determinants of insurance demand however, infla tion has a negative correlation with demand of insurance.Beck et al. (2003) found out the two main services provided by life insurance income replacement for premature death and long-term savings instruments. They considered three demographic variables i.e. young dependency ratio, old dependency ratio and life expectancy, higher levels of education and greater urbanization as independent factors in explaining insurance demand.Income is positively co-related with purchase of health insurance product, concluded from various studies conducted in different countries by Propper (1989) in UK Cameron and Trivedi (1988) in Australia and Hurd and McGarry (1997) in USA.Barrett and Conlon (2003) concluded from their study that choice of health insurance essentially entailed a simple decision whether or not to purchase private health insurance. Binary discrete choice models using either logit or probit has been used to analyze determinants of this type of purchase decision.Cameron and Trivedi (1991) specified a conditional expected utility function that is associated with alternative health care regimes. The consumer chooses the regime that maximizes expected utility.Feldstein (1973) noted that as the price of health care increases, the demand for insurance should also increase. This is because an increase in the risk of net worth depletion. Healthcare expenditure largely depends on healthcare costs.Nyman (1999) noted that higher healthcare costs may led to higher demand for insurance in the grammatical construction of rising costs. However, people belonging to different income groups are likely to react differently to these changes. Kronick and Gilmer (1999) argue persons with low incomes and few assets buy insurance to begin with to protect their health.Van De Ven and Van Praag (1981) noted that, education and income are generally positively correlated. Higher income generally decreases the opportunity cost associated with the purchase of private health insurance. O verall, increases in both income and education would be expected to lead to an increase in the probability of buying the insurance.Some studies conducted in context with the financial performance of General Insurance Companies of India. The Researcher has studied those research works which are as followsPerformance of various plans marketed by Life Insurance Corporation of India A case study of Rajkot Division, A utterance by Mrs.Sonal Naina evalua